What is triple halving of Ethereum and why does it matter?
The combination of EIP-1559 and the corresponding move toward a proof-of-stake model would represent a “triple halving” for Ethereum
So exactly, what is Ethereum halving?
At the heart of this question are three fundamental pillars
- Cost of energy consumption to mine coins
- Inflation and value of coin
- The relationship of “proof of work” and “ proof of stake” to the above two
So let’s dive in for an understanding of “proof of work” and “proof of stake”.
To do that lets start with Bitcoin:
BTC, or Bitcoin, relies on the Proof of Work principle for authorisation. This means that a mathematical cipher or puzzle must be solved before a transfer can take place from one account to another. However, this method has some consequences. It consumes computing capacity and slows down transactions due to the nature of mining coins, which is incredibly energy-consuming. Not only are there ecological concerns around this, but PoW also requires an ever increasing amount of time per puzzle — making blockchain slow and inefficient, in urgent situations such as sudden price fluctuations.
Till now it was the same for Ethereum in terms of authorisation. But over the last couple of years the emergence of DeFi , has created different use cases for financial decentralisation.
The need for a different form of authorisation that consumes less power, manages volatility and improves security has been a consistent ask from users, developers, investors and buyers.
And hence Ethereum has started on this journey to Ethereum 2.0.
This is where the triple halving of Ethereum comes in.
So what is this Ethereum 2.0?
Ethereum 2.0 has been developed specifically to address scalability issues that are currently holding back wider cryptocurrency adoption by giving people(and users)more incentive than ever before. IE, if you’re part of the Ether network with some stakes saved up, then even you get rewarded.
It is a whole new protocol that changes the way consensus is achieved, from relying on intensive proof-of-work to proof-of-stake in Ethereum blockchain tokens. Instead of rewarding blocks with the greatest computing power as it does now, you’ll have 1% share for every ETH token you own when writing and submitting your block — no matter how much computational power they may or may not represent. It will also allow you to participate in liquidity pools with your own stake, thereby allowing you to earn from multiple DeFi protocols that are on’ chain and which you participate in.
So how is this happening?
An August 5, 2021 an Ethereum upgrade, known as the London hard fork , was affected to bring a major change in the form of EIP-1559.
What is EIP — 1559? It is a code change that begins to remove some ETH from circulation.
What? Remove coins from circulation?
EIP-1559 will change how transaction fees work. Though the details are complicated , the upshot is that anyone who makes a transaction on the network will now pay a base fee that will be burned instead of going to Ethereum miners. Burning, in this sense, means to take coins out of circulation by essentially sending them to an address that no one has the keys for.
Reducing ETH supply will create “deflationary pressure” on the Ethereum network. Though new coins will still be created with each block added to the chain, a little bit of ETH will also be disappearing.
This deflationary pressure theoretically will squeeze prices upward because the growth of supply will be slowing.
Why this and have other crypto currencies undergone something similar?
Yes . The perfect analogy is Bitcoin. Bitcoin underwent “Halving”- which is similar to “Burning’ in this case.Both fundamentally causing decrease of inflation. The most recent Bitcoin halving was on May 11, 2020, when BTC rewards decreased from 12.5 BTC to 6.25 BTC. On that day, the price of Bitcoin was $8,800. Over the next six months, it nearly doubled in price. And today, 1 BTC will cost you nearly $40,000 or $60,000 depending on the day of the week and volatility.
Basically “halving” creates scarcity which pushes the price of the coin up. The more scarce the coin, the more valuable it becomes.
Analysts compute that sell pressure will drop by roughly 30% with EIP-1559, meaning there will be a lot less ETH available on markets to buy. Some analysts say price of ETH can go up to #150,000 by 2023. ( Exercise caution and make own decisions based on your own learning and on analyst reports)
So what does that mean?
The combination of EIP-1559 and the move toward a proof-of-stake Ethereum 2.0, would represent a “triple halving,” as they would reduce sell pressure by an estimated 90% — — the equivalent of three Bitcoin halvings.
What then now?
In the next two years, developers will be fast tracking “The Merger” which will end proof of work forever and usher in the proof of stake era. The Merger could happen by the end of 2021, or perhaps early 2022,”
One of the first obvious implication of this upgrade will be the transition from a mine and dump economy to a stake and restake economy: Proof-of-stake encourages saving since the more ETH you have the more you make. Proof-of-work encourages selling.
Another major aspect might be that the PoS transition will cut down emissions by 90%. Thus, the daily block rewards will reduce from 12,800 to 1280 ETH and inflation will also be one-tenth from the existing 4.3% to 0.43%, equivalent to 3 Bitcoin halvings.
Moreover, EIP 1559 will introduce fee burning and will be another factor to make ETHER rarer and inflate the price of the coin
- A more stable coin with lesser price fluctuations
- A more costlier coin
- A more stable network with far less energy consumption
- More DeFI applications created to drive financial decentralisation and a parallel economy
- More real world applications
In my day job I drive growth at Google. Ex @ Adobe, SAP, LinkedIn and IBM
For the next few months I will use this publication on Medium titled Metapherse to curate my experiences of learning web 3.0 in the open.Follow me on twitter @hackrlife or on my substack on all things Web 3.0 here.